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The Real Shale Story Is No Longer in the United States

It has been nearly four months since Crimea voted to secede from Ukraine and join Russia. Since then, pro-Russian rebel groups have risen in other parts of the east, but with limited success. The new Ukrainian government has been able to retake some of the region, but the conflict is surely far from over.

Neither Russia nor Europe wants an escalation. The Eurozone sends 7.4% of its exports to Russia and receives 12% of its imports from the country, mostly in energy products. Russia sends more than half (53%) of its exports to Europe and receives 42% of its imports from the region. Despite the strong economic ties, the majority of Ukrainians in the eastern part of the country are ethnically Russian, and the civil unrest is likely to smolder for years.

The Eurozone depends on Russia for 40% of its natural gas, and President Putin has used this fact several times, threatening to cut off exports if leaders do not acquiesce to Russian demands. Whether tensions flare up again or not, the geopolitical damage has been done. The constant threat of limited energy imports has driven the EU to reevaluate its policies on domestic oil and gas production.

The next shale boom will be EuropeanMost members of the EU produce little energy domestically, and non-conventional drilling is banned or under moratorium in many countries. France has banned hydraulic fracturing (fracking) outright, while Bulgaria and the Netherlands have only recently softened their positions.

Against this preference for importing energy, the Energy Information Administration (EIA) estimates Europe's recoverable reserves of shale gas as high as 600 trillion cubic feet (Tcf). Reserves would cover the 18 Tcf annual demand for more than 33 years. Beyond the prospect of energy independence, the International Association of Oil & Gas Producers estimates that Europe could create 1.1 million jobs if it were to explore its own fields more aggressively.

Even on current exploration efforts, the EIA sees shale gas as a significant part of OECD Europe production over the coming decades. This forecast could prove conservative on the effort of a few key players in the space.

Chevron (NYSE: CVX) has been one of the first major oil companies to invest in the region's potential. The company plans to invest nearly $600 million over the next 15 years to explore and develop Romanian fields. Bulgaria has recently lifted its moratorium and granted Chevron a permit to explore the country's estimated 17 Tcf of gas reserves.

Poland has been one of the most aggressive in the region to develop its estimated 148 Tcf of shale gas reserves. Chevron has teamed with a domestic company to evaluate shale resources in four licensed areas near the Ukraine border. Along with a strong pipeline of growth projects, Chevron increased its capital spending by 22% last year to $38 billion and could eventually see massive cash flow on higher production.

Faced with a fracking ban in its home country, Total SA (NYSE: TOT) has also been positioning for European shale production. The company announced earlier this month that it would drill test wells for shale gas in Denmark toward the end of this year. The drilling campaign is scheduled to run for three months in northern Denmark. If results are positive, the company plans to conduct a fracking test in 2015.

ExxonMobil (NYSE: XOM) has been authorized 12 exploratory concessions in Germany and is the largest natural gas producer in the country with 70% of total output. The company recently terminated exploration in Poland after two gas wells failed to yield commercial quantities, though Chevron and ConocoPhillips (NYSE: COP) remain in the country to develop its estimated 67.1 Tcf reserves.

Europe's stance on unconventional production will not change overnight, but higher Brent crude prices and continuous threats from Russia have driven policymakers in the right direction. The major integrated oil companies have significant experience from U.S. assets that should help quickly boost production in the region. Companies increasing their capital investment plans significantly could see much higher cash flows in the future.

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The whole problem with this is these huge companies had NOTHING to do with the US shale gas and oil boom. They walked away from the technology saying that it would not work and now they are paying huge premiums to buy midsized producers. Exxon in fact bombed out in Poland. The real action will be Poland though because they feel the heat from Russia more than anyone else. In recent months, they have been negotiating with the wildcatters who DID open up the shale fields. Those men have the real knowledge and experience. Word is several of them have agreed to terms with the Polish government. Ukraine is also interested in working with the wildcatters. The French will be like NY State and continue the ban until everyone else is reaping benefits. By then the gas price falls and no one can afford to drill in France!